About new tax NOT reform
Strengthening of the control over small and medium-sized business, the complication of reporting, new taxes for motorists and allusions to the continuation of electronization in the tax area. These are the main provisions of the “scale” of the tax reform, which was presented by the Ministry of Finance.
As I promised, my evaluation of the concept of tax “reform”, which was presented by the Ministry of Finance with such pathos. Let me remind that reform process means a radical revision of the institutional framework of the tax system. Materials, which are provided in the website, does not have such features.
Thus, I use the word ‘reform’ in quotation marks.
It comes about point modifications in the tax field. It obviously will not make life easier for Ukrainian business. In some respects, it even more complicates.
In general, presented concept is more like a piece of propaganda, rather than a deep and elaborate a plan of innovation.
I would like to focus on some provisions that contain some specifics.
Transfer pricing: a new method of pressure on small and medium business
In 2013, under my leadership there was worked out and adopted this law. We considered the control over transfer pricing as the most accurate way to prevent removal of assets in offshore accounts by large business not affecting the vast majority of entrepreneurs.
Let me remind you, control over the operations of Ukrainian companies with related parties in the offshore and low-tax jurisdictions should be carried out by the tax authorities, starting from May 2014. During three years it was expected for an additional revenue nearly 20 billion UAH according to the most modest estimates.
Since that time, under the pressure of large business, the law has undergone significant modifications. Its essence was actually blurred.
In fact, offers for further “reform” made by the Ministry of Finance are intended to rectify the situation. I think it is correct. BUT: in such form (which was suggested), additional control will be introduced over virtually all business!
In particular, the Ministry of Finance offers to abolish the threshold for operations that are related to the control in the area of transfer pricing.
Let’s dwell on the issue, because not all the “abolition” – is a blessing. This little “innovation” threatens big troubles around the business, which is working in Ukraine.
The version of the law, which was originally adopted in 2013 assumed that control will be conducted over the companies, which are operating in Ukraine with more than UAN 50 mln. with a single counter-party (according to the rules of the transfer pricing). In fact, only LARGE business, which was carrying out operations with a specific list of countries, fell under the control. According to our calculations, there was no more than 500 companies.
In 2014 the law was amended, and provided that the criterion for falling the company under the control of the tax authorities is not due to a single operation, but in general indicators of its annual turnover – UAH 20 mln. with the volume of the operations group of UAH 1 million. According to the latest modifi-cations in July, the criteria have been increased to UAH 50 million and UAH 5 million respectively.
Let me remind you, according to “Economic Code of Ukraine”, enterprises with an annual turnover of up to EUR 2 million belong to the category of micro-enterprises. Nowadays, it is about UAH 50 mln.
Now the Ministry of Finance offers to remove the threshold for controlled operations at all. It means that all Ukrainian enterprises, which carried out at least one or two deals during the year with countries, where tax rates are lower than in Ukraine, can fall under the control. For instance, with Cyprus, Georgia, Uzbekistan, Turkmenistan, Montenegro, Switzerland and others.
In response to this “initiative”, the offer of the Ministry of Finance to abolish the upper limit of fines for failure for non-providing the documentation for the shopping center looks as a profound irony.
During the development of the law, it was originally envisaged that companies, which do not submit reports, will pay a penalty of 5% of the transaction amount, which falls under control. Why was it necessary? In order to discipline the big business to submit reports. It could be done only through the significant financial penalties.
In July 2015 the Parliament has reduced the fine up to 1% of the transaction amount, but not more than 300 minimum wages – for not displaying operation in the report, and – 300 minimum wages for the mere fact of non-providing of the report!
Do you think it’s easier for big business – to show the reported multi-million profits and pay taxes or just pay a fine $ 15 thousand? I think the answer is obvious.
In fact, the whole “control” risks turning endless inspections and penalties specifically for small business that conducts transactions with foreign counterparties.
Either the Ministry of Finance do not fully understand the essence of its own offers or purposefully create new tools of pressure on small and medium business. At the same time, big business will be able to easily evade enforcement of the law through its lobbyists in parliament and government.
Ordinary “deposits” for business
Another initiative of the Ministry of Finance related to the establishment of a mandatory guarantee / deposit, as a condition for appeal of tax notices, decisions is absolutely fiscal and not justified.
If the offer is implemented, the company should contribute funds to deposit or agree with the bank on guarantee, which is not cheap, in order to appeal on additional accruals of tax.
Taking into the account “genius” electronic VAT accounts (which were implemented last year), it is additional freezing of funds of the enterprise during the period of appeal. In consideration of judicial red tape in Ukrainian courts, money can be withdrawn from the market for more than a year.
It is noteworthy that in this case no liability is provided for the staff of the fiscal authorities. The taxpayer will give them a guaranteed amount of the deposit to the state, if he loses the court. The state does not risk anything.
The increasing complexity of reporting
The life of accountants of enterprises will become more difficult in case of implementation of the following offer of the Ministry of Finance. It is related to the restoring the requirement of having link between business expenses and their economic activity for the costs, which are taken into account for tax purposes.
Accounting, particularly international standards, does not allow enterprises to classify the expenses that are not related to the economic as the costs. The introduction of the newly established procedure for taxation of income changes, which do not relate to the new system, will only confuse and complicate accounting.
The car – is a luxury rather than a means of transportation
Of course, many Ukrainian citizens will affect the provision about change in the taxation of cars and motorcycles under the age of 5 years, depending on engine size. Developers do not specify changes, whether they want to impose a similar tax on all owners of transport, regardless of engine size (nowadays, over 3 liters) or still apply a differentiated approach.
In addition, it is proposed to introduce a higher vehicle tax for cars segment of “premium” and “luxury”, with the average market price more than UAH 1 million.
Is it fair? 10 million Ukrainian motorists will judge this.
A little positive for entrepreneurs
The only “candy” for taxpayers in all this “reform” will be an offer to open an access for them to the data of tax authorities on the status of calculations.
This is really important and necessary. Let me remind that in 2013, the Ministry of revenue and duties has already launched such service in test mode – “Electronic office of the taxpayer.” Unfortunately, six months ago, the new leadership of SFS stopped this process. I hope that the Ministry of Finance is not planning to build from the ground prepared and researched mechanism, but just renew previous project. Otherwise, this innovation will be delayed for another year/
What should business expect for?
The most interesting thing, of course, is not what is included in such a visual concept, but what remains behind the scenes. So-called “sensitive issues.”
For instance, discussed proposition related to the simplified tax system, which should be left only for natural persons-entrepreneurs with annual turnover of up to UAH 300 thousand during the calendar year. In fact, business that is trading in the markets, some customer service department, very small business can fall under this category. Legal entities – are the payers of the single tax will be transferred to the general taxation system.
How will this reform help in simplification of the doing and development of the business? The question is rather rhetorical.
The share of small business in the country is tiny – less than 2%. Its transfer to the general taxation system will lead to a significant reduction in business activity and an increase in unemployment. The best thing the state can do for this category of taxpayers – is not to change the tax system during 5 years.
Another “sensitive” issue – is a planned increase in the VAT rate to 22%, which can lead the next rise in price products and services. In any case, end-user (the citizens) pays for the VAT. I’m not even talking about the fact that after the introduction of the system of electronic administration on July 1, 2015, it was violated the economic meaning of this tax, which, in fact, has become a turnover tax for the majority of enterprises.
Another innovation offered by the government – is the transfer of payment of the single social contribution on wages from the employer to the employee – is just a fiction. The employer must keep this fee and transfer it to the budget. Nowadays, SSC is 3.6%, tax on income of individuals is 15% (20% on the higher income), war tax – is 1.5% from the monthly salary of an employee. In addition, together with all of the deductions, the employer calculates the payroll of another 67 SSC interest rates depending on the risk class in production (from 36.76% to 49.7%). What will give so-called «bruttizatsiya» of the salary? It will provide employee an opportunity to observe a process, when more than 50% of his earnings are consumed and are not accumulated for his pension in the future. Decreasing of SCS rate by 7-8% will not lead to deshadowing of the salary. It’s just another form of payroll tax.
Overall, it is difficult to make a comprehensive presentation about the planned changes in the tax field after the presented materials of the Ministry of Finance. I can say only one thing: business can not operate normally under the conditions of constant, low-intensity and periodically change the vector of “tax reform”. Reforms are justified if they really make life of business easier, the public system more transparent, and the country more attractive to investors. However, the key word here is MAKE. Reforms for the sake of reforms, especially the reform for the sake of public relations and political dividends – are doomed to failure.